Whether it's a recession or an economic boom, one thing doesn't change, the need for energy. And until technology leaps ahead, coal is the largest producer of fuel for the generation of electricity in the world. It's also the most abundant fossil fuel in the United States. Coal is obviously not recession immune as people tighten the reigns on their lives and cut back on electricity consumption, but the shear necessity of electricity makes the coal industry fairly resistant. An investment in an exchange traded fund (ETF) that is centered on the coal industry is a great way to hedge your bets by investing in a pool of successful companies in the coal field.
Market Vectors Coal ETF (NYSE: KOL) seeks to replicate the price and yield performance of the Stowe Coal index, which provides exposure to publicly traded companies worldwide that derive greater than 50% of their revenues from the coal industry. With KOL you'll own shares of some of the most noted coal companies in the world, including Arch Coal Inc. (NYSE: ACI), which specializes in steam and metallurgical coal; CONSOL Energy Inc. (NYSE: CNX), a large provider of fuel for electricity in the United States; Alpha Natural Resources Inc. (NYSE: ANR), another leader in steam and metallurgical coal; and Peabody Energy Corp. (NYSE: BTU), an exploration miner and coal producer worldwide, as well as several other highly rated coal companies across the globe.
Market Vector charges only a 0.65% fee, a fraction what a professional money manager would charge you to analyze research and pick coal mining stocks with this level of global reach. Recently KOL has gone through a typical correction for this commodity sector, but then suffered a greater hit as Asia saw a 20% decline in spot prices for thermal coal. The result? A better deal for those currently willing to dive into coal as an investment. KOL is up 14%, so maybe there's some light at the end of the mine.
While other earnings may have disappointed last week, the news was good for oil giant ConocoPhilips (NYSE: COP). In what some took as a good sign for big oil, the Houston-based company reported that third quarter net income surged 41% year over year to $3.39 per share, and that revenue also surged 52% to $70 billion. We'll see whether the good news extends to other petroleum giants scheduled to report quarterly results this week.
Analysts surveyed by Thomson Financial are looking for BP (NYSE: BP) profits to have grown 43.2% in the most recent quarter to $2.34 per share on revenue of $109.7 billion, and Chevron Corp. (NYSE: CVX) to post earnings up 39.4% to $3.25 per share on revenue of $86.8 billion. Marathon Oil Corp. (NYSE: MRO), ExxonMobil Corp. (NYSE: XOM), and Royal Dutch Shell (NYSE: RDS.A) likewise are expected to report higher net income of $2.33 per share (sales of $23.4 billion), $2.40 per share (sales of $131.4 billion), and $2.65 per share, respectively. Even Valero Energy Corp. (NYSE: VLO) is expected to post earnings slightly higher to $1.46 per share (sales of $36.4 billion), despite the effects of Hurricane Ike. Among these companies, only BP and Valero beat earnings expectations in the previous quarter. Not surprisingly, analysts on average recommend buying all except Valero, and shares of all of these companies have recently hit 52-week lows.
During July, the prices of oil exploration and coal stocks mentioned in my newsletter tumbled precipitously. For example, Arch Coal (NYSE: ACI) and Peabody Energy (NYSE: BTU) lost roughly a quarter of their value by the end of July and Ultra Petroleum (NYSE: UPL) and Southwestern Energy (NYSE: SWN) which had been up over 40% through June ended July up a relatively paltry 4% and 11% respectively.
I find this interesting because it violates one of the basic theories I have about what moves stock prices. This beat-and-raise theory says that if a company beats earnings estimates and raises its guidance, then the stock will rise. Otherwise it will fall. In the case of these four companies, each of them with the exception of Ultra which did not report, reported doubling or tripling of earnings and raised their guidance.
So why did their stocks fall? In the case of the oil and gas companies, it could be because of declining oil prices. Those peaked at $146 a barrel and recently traded at $127. But I am not aware of any diminution in the price of coal for which demand is strong due to Chinese and Indian infrastructure investment among other factors. Coal is used to make steel and to fire up power plants.
MOST NOTEWORTHY: Progressive, Netflix and Public Service Enterprise Group were today's noteworthy upgrades:
Wachovia upgraded Progressive (NYSE: PGR) to Market Perform from Underperform based on modest signs of improvement in underwriting trends.
Lehman upgraded Netflix (NASDAQ: NFLX) to Overweight from Equal Weight based on strong core trends and a potential announcement of digital service partners into its May 28 investor day.
Credit Suisse upgraded Public Service Enterprise Group (NYSE: PEG) to Outperform from Neutral based on earnings growth through utility investment, valuation, upside from U.S. CO2 policy.
OTHER UPGRADES:
Precision Drilling (NYSE: PDS) was raised to Outperform from Sector Perform at RBC Capital.
Hertz Global (NYSE: HTZ) was upgraded at Soleil to Buy from Hold.
Calyon upgraded Foundation Coal (NYSE: FCL) and Arch Coal (ACI) to Add from Neutral.
"Arch Coal (NYSE: ACI) is fired up from its first quarter earnings; the results were well above analysts expectations," notes Joseph Hargett.
And with 13.5 million shares of the stock sold short, the analyst with Schaeffer's Research explains, "Shorts account for about 9.5% of the stock's float, which could result in a short squeeze." Here is his review.
"Net income nearly tripled to $81.1 million, or 56 cents per share. Revenue for the auarter rose to $699.4 million from $571.3 million. For the year, Arch Coal lifted its earnings estimate to a range of $2.40 to $2.80 per share, versus Wall Street's consensus view for $2.43 per share.
"Digging into the report, the company noted that profit margins were particularly wide in the Central Appalachia region, while higher prices for coal and cost controls also contributed to the results. Arch noted that the average sales price per ton rose 9.7% to $18.49 from $16.85, while the cash cost per ton rose less than 1% to $13.05 from $12.93.
Despite a tumbling economy where recession fears gain ground each day, the good times are rolling for coal producer Arch Coal Inc. (NYSE: ACI) which reported this morning that its first-quarter profit nearly tripled. For this period, the company counted strong demand and higher fuel prices. Wall Street expressed enthusiasm over its surprising earnings numbers by pushing the stock to a new 52-week high.
The coal producer said its profit increased during the first quarter to $81.1 million. This is a significant jump from the same period of last year when the company reported a profit of $28.7 million. Arch Coal posted quarterly earnings of 56 cents per share, topping analysts' predictions for earnings of 46 cents per share.
Taking a look at the company's quarterly revenue, we see a growth of 22% to $699.4 million as prices have almost doubled during the past year. The company also said it sold 34.3 million tons of coal in the first quarter compared with 31.4 million tons in the same period a year ago. Analysts had forecast $686.8 million in revenue, according to Thomson Financial.
Arch Coal (NYSE: ACI) is engaged in mining, processing, and marketing coal. The company produces about 130 million tons a year from more than 20 mines in the western US and central Appalachia. It has proven and probable reserves of about 2.9 billion tons. The low-ash coal used to fire electric utility boilers accounts for most of the company's revenues. The firm provides the fuel for approximately 6% of the electricity generated in the United States. It also supplies steel producers and industrial facilities.
Arch affirmed FY08 earnings guidance, earlier in the week. Management said it expected EPS of $2.00-$2.50, versus Street consensus of $2.42. The CEO noted that U.S. coal requirements are expected to soar this year, ensuring that prices will remain strong.
MOST NOTEWORTHY: The coal sector, independent refiners and Alexion Pharmaceuticals were today's noteworthy downgrades:
Goldman downgraded the coal sector to Cautious from Neutral, citing valuations and expectations for lower coal prices. The firm downgraded CONSOL Energy (NYSE: CNX) Peabody Energy (NYSE: BTU) to Neutral from Buy and Arch Coal (NYSE: ACI) to Sell from Neutral.
Lehman downgraded independent refiners, including Alon USA Energy (NYSE: ALJ), to Negative from Neutral and continues to believe that 2H07 marked an inflection point for U.S. refiners, which are transitioning from a multiyear up-cycle into a new downtrend.
Alexion Pharmaceuticals (NASDAQ: ALXN) was lowered to Market Perform from Outperform at Wachovia following the company's Q4 results, as they believe management's revenue guidance represents a best-case scenario.
OTHER DOWNGRADES:
Lehman lowered Bayer (OTC: BAYRY) to Equal Weight from Overweight and Whole Foods (NASDAQ: WFMI) to Underweight from Equal Weight.
Most investors are aware that China's surging growth and increasing energy use have helped push oil to +$90 per barrel near-record highs. But what many probably don't know is that China's double-digit GDP growth is forcing up the price of another major energy source: coal.
The price of coal -- the most plentiful energy resource -- is rising at an alarming rate: Asia prices are up more than 30% this year, The Wall Street Journal reported Tuesday(subscription required), due mostly to China's net importer status. China had been a net exporter of coal, but in mid-2007 it imported coal for the first time. Coal is trading above $125 per metric ton. In 2003 it traded at about $25 per metric ton. Since January 2007 alone, coal is up more than 140%.
U.S. coal suppliers have benefited from the run-up: Arch Coal (NYSE: ACI) is up about 90% since August 2007; ACI was down about $1.50 to $53.32 in Tuesday afternoon trading. Meanwhile, Peabody Energy (NYSE: BTU) is up about 45% since August 2007; BTU fell 40 cents to $56.12 on Tuesday afternoon.
Arch Coal (NYSE: ACI) is engaged in mining, processing, and marketing coal. The company produces about 130 million tons a year from more than 20 mines in the western US and central Appalachia. It has proven and probable reserves of about 2.9 billion tons. The low-ash coal used to fire electric utility boilers accounts for most of the firm's revenues. Arch provides the fuel for approximately 6% of the electricity generated in the United States. It also supplies steel producers and industrial facilities.
The company pleased investors last week, when it reported Q4 EPS of 56 cents and revenues of $644.4 million. Analysts had been looking for 47 cents and $641.1 million. Management also guided FY08 EPS to $2.00-$2.50, versus Street consensus of $2.43. Friedman Billings and Lehman Brothers subsequently reiterated "outperform" and "overweight" recommendations, respectively. JP Morgan upgraded the issue to "overweight". Price targets of $70-$72 were declared.
TheStreet.com's Jim Cramer explains why the unique dynamic of oil as a commodity gives alternative fuels a "magic" price point.
Boy, that ethanol is cheap. It's cheap if we use corn, and it is even cheaper if we use soy. It doesn't matter how much it costs or how much infrastructure is needed, it's become the low-cost gasoline even with the stupid unnecessary subsidies.
Amazing, isn't it? But that's why Monsanto (NYSE: MON) (Cramer's Take) and Bunge (NYSE: BG) (Cramer's Take) are so cheap and why all of the various "sun" stocks are inexpensive. Oil at $92, going to who knows where, is going to make all of these unnaturally natural alternatives the low-cost fuels.
There are a lot of fuels that are cheaper to produce than oil now, particularly if you read Chris Edmond's unbelievably good series out of the Middle East. It's all demand-on-fire, supply disappearing that is controlling the price. It isn't Nigerian terrorism or Iranian intransigence or Iraqi-Turk tensions.
Those are all just headline terms by writers searching for a reason to write about oil jumping. They have no choice. They can't keep writing "because supply is outstripped by demand," even though that's what is happening.
In a sense, we have a fabulous opportunity as a country to make some headway here on domestic security because of this umbrella. Even coal, which will now never amount to much given the Democrats' desire to stop global warming, becomes too viable to ignore as the rallies in Peabody Energy (NYSE: BTU) (Cramer's Take) and Arch Coal (NYSE: ACI) (Cramer's Take) show.
So, the endless moves up will continue. I have never seen a commodity that has no price at which demand tapers. So anything with a price point of $80 or less is now a go.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer had no positions in stocks mentioned.
MOST NOTEWORTHY: Papa John's (PZZA), Wynn Resorts (WYNN), SourceForge (LNUX), Cathay Pacific (CPCAY) and Arthur J. Gallagher (AJG) were today's noteworthy downgrades:
Matrix downgraded shares of Papa John's (NASDAQ: PZZA) to Hold from Strong Buy to reflect minimal improvement to fundamentals and negative free cash flow trends.
Wynn Resorts (NASDAQ: WYNN) was downgraded to Peer Perform from Outperform based on valuation as the firm believes shares fully reflect solid Las Vegas & Macau fundamentals and the company's development pipeline.
SourceForge (NASDAQ: LNUX) was cut to Underperform from Market perform at JMP Securities, with a $3 target, following the disappointing results.
Merrill Lynch downgraded Cathay Pacific (OTC: CPCAY) to Sell from Buy on valuation.
Arthur J. Gallagher (NYSE: AJG) was cut to Underperform from Peer Perform at Bear Stearns as they believe margin expansion will be lower than expected, softening insurance pricing will impact organic growth, and cites managements acquisition desires over aggressive repurchases...
MOST NOTEWORTHY: Novartis AG (NVS), Intel (INTC), Total S.A. (TOT), Syniverse Holdings, Inc (SVR) and Kindred Healthcare (KND) were today's noteworthy downgrades:
Merrill cut Novartis (NYSE: NVS) to Neutral from Buy based on a lack of near-term catalysts. Credit Suisse downgraded shares of the company to Underperform from Neutral on expectations of slowing sales growth in 2H07.
JMP Securities downgraded Intel (NASDAQ: INTC) to Market Perform from Outperform based on valuation and lower estimates.
JP Morgan cut Total S.A. (NYSE: TOT) to Neutral from Overweight on valuation.
Syniverse (NYSE: SVR) was cut to Strong Sell from Sell at Matrix USA as competition in North America is creating a cut in Network Services and Number Portability Services revenue.
Kindred Healthcare (NYSE: KND) was cut to Underperform from Market Perform at Wachovia based on valuation...
OTHER DOWNGRADES:
DaVita (NYSE: DVA) was downgraded to Hold from Buy at Deutsche Bank.
While other earnings may have disappointed last week, the news was good for oil giant 
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Here are some highlights from this past week's 
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Most investors are aware that China's surging growth and increasing energy use have helped push 
TheStreet.com's Jim Cramer explains why the unique dynamic of oil as a commodity gives alternative fuels a "magic" price point.
Big 3 CEOs drive to Washington to suck up to Congress
GM and Ford ready weak pitches for taxpayer bucks
Cramer on BloggingStocks: A troika of opportunity and trouble 
